Treasury in dark on cost of Pillar of Cloud

If there is a ground operation, it will put a strain on an already overstretched 2013 budget.

Senior Ministry of Finance officials met for an emergency discussion this morning on the consequences of Operation Pillar of Cloud in the Gaza Strip. The ministry refused to comment today on the cost of the operation. "It's impossible to know. It's very early to estimate the costs. Even we don't know if this is a macro event," a senior official said.

So far, the costs of the operation amount to the military cost and indirect damage to property. A special fund at the Tax Authority is set aside for the latter, so that the fiscal consequences are very limited.

Treasury official said today that, in order for the costs to be estimated, the following points needed to be clarified: whether there will be a general call-up of reserves; whether there will be a ground operation; and how long the operation will last. "The situation at the moment is not one of equilibrium either the operation will end in the next few days, or it will be broadened. If it is broadened, reserves will be mobilized, and then there will be large payments to National Insurance, and ground forces will go in, involving costs of munitions. Then we will be somewhere else. It will be a macro event, and we will be in Operation Cast Lead 2. Operation Cast Lead 1 cost us NIS 2-3 billion. That will already be a macro event."

If an Operation Cast Lead 2 scenario materializes, Finance Ministry sources say that "we will have to sit down and examine what we should do", as one senior official put it. It will be recalled that there are budgetary commitments for 2013 of some NIS 12 billion more than permitted under the fiscal regime. The deficit for 2012 is expected to be higher than 4% of GDP, and for 2013, because of the worsening in the slowdown in economic activity, a similar deficit is projected. An operation costing NIS 3 billion like Operation Cast Lead will be a heavy burden on the state budget in 2013 and will oblige the government to make bigger spending cuts.

The Ministry of Finance also understands that to the extent that the fighting is prolonged, the defense establishment will come along with additional budgetary demands in another few months in advance of the drafting of the next budget. "That will certainly happen," said a senior Ministry of Finance official, "but we really don't want to start arguing with them now. This is not the time."

Ron Eichel, Chief Economist and Strategist at Meitav, wrote today that, in his view, the direct daily cost (not including loss of output by businesses) of the current operation will be lower than that of Operation Cast Lead, which was estimated at NIS 100-200 million, and will be about NIS 100 million. The reason for this, according to Eichel, is that Operation Cast Lead opened with a massive attack by the Air Force, in contrast to the surgical strikes being carried out this time. Furthermore, Eichel points out, in Operation Cast lead the Iron Dome rocket interception system didn't exist, and it can therefore be expected that the civilian damage will be lower than in the earlier operation, despite the high cost of firing an Iron Dome missile ($35,000-50,000 each). Eichel believes that, if there is a ground operation and costs grow to NIS 2-3 billion, "we will pay, through extra taxation and not through an expansion of the deficit, which is already at the upper limit of what is considered acceptable by the rating agencies."

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